Chile has one of the best run economies in the world, with fiscally sound government and strong economic growth prospects.
Chile | USA | Brazil | |
2012 Est. GDP Growth | 4.3% | 2.1% | 3.3% |
2013 Est. GDP Growth | 4.9% | 2.2% | 4.5% |
Budget Balance (GDP%) | +2.3% | -7.8% | -2.5% |
However, the Chile ETF (ECH) has jumped more than 35% in the last six months and may be ready for a breather. Its trailing P/E ratio is now 16, vs. 10 for Brazil (EWZ), and 13 for the SPY. Instead of taking gains and paying taxes, I prefer to hedge my exposure by shorting the Aberdeen Chile Closed End Fund (CH).
CH is a gift to Chile investors. Its top holdings match those of ECH almost perfectly.
ECH Top Holdings | Top CH Holding? | ADR |
Empresas COPEC SA | Yes | - |
Cencosud SA | No | |
Soc Quimica Y Minera | Yes | |
Empresa Nacional El. | Yes | |
Enersis SA | Yes | [[ENI] |
Banco Santander Chile | Yes | |
Empresas CMPC SA | Yes | - |
Lan Airlines SA | Yes | |
S.A.C.I. Falabella | Yes | - |
Cai International | No |
But the big bonus is this: CH trades at a 13% premium to the value of its holdings. Not only is this premium big, it's way beyond its 1, 3, and 5 year averages (6%, -.79%, and -3.21%, respectively).
Why someone would pay any premium at all to buy a bundle of stocks that you can easily buy as ADRs is beyond me. It could be because it pays a phony dividend of 8.9%, which is really just the portfolio gains repackaged as a distribution.
In any case, Chile investors who want to hedge their holdings in ECH or in ADRs like EOC or ENI can short CH and be content in the knowledge that closed end funds that fly high on huge premiums will eventually get blown down. The price history of Alpine Total Dynamic Dividend (AOD) shown below is instructive.
CH is a nice short hedge with a 10% buffer built into it. Even if the Chilean market heads higher, CH may go lower.
Additional disclosure: I am short CH.
